Josh Kopelman

Managing Director of First Round Capital.

espite being coastally challenged (currently living in Philadelphia), Josh has been an active entrepreneur and investor in the Internet industry since its commercialization. In 1992, while he was a student at the Wharton School of the University of Pennsylvania, Josh co-founded Infonautics Corporation – an Internet information company. In 1996, Infonautics went public on the NASDAQ stock exchange.

Monthly Archives for 2010

I've been going to the TED conference for almost 10 years now -- and I've seen hundreds of incredible speakers take the stage. Last year, Benjamin Zander - the conductor of the Boston Philharmonic, gave what I think is one of the best talks of all time. Zander is the Steve Jobs of classical music.

An online video of his talk was just released this week. Ostensibly, his talk was about classical music. But, in reality, Zander shows how in just twenty minutes one can expose people to new ideas, new possibilities and new passions. He truly embodies his belief that "one of the characteristics of a leader is that he not doubt for one moment the capacity of the people he's leading to realize whatever he's dreaming". I especially liked his realization that since the conductor of an orchestra doesn't make a sound, he depends for his power on his ability to make other people powerful. His job is to awaken possibility in other people.

Take 20 minutes out of your day today and watch this talk. You'll see an moving example of leadership, evangelism and passion. And see how a leader can make your "eyes shine".

So I was talking the a CEO of one of our portfolio companies today. He runs an enterprise software company, and we were reviewing his pipeline. During our conversation, he mentioned that he lost a $12,000 sale because of fuel prices. Yes, that's right -- the price of gasoline is now impacting enterprise software sales.

Apparently, the customer was a large county school district. And despite the fact that they had spent months going through a detailed RFP process (which our company won), the project was killed at the last minute. The district has had to cut virtually all IT spending so they can pay for gasoline for their school buses and maintenance vehicles. Apparently, they are not alone. School districts across the country are facing similar issues.

What a tough month. First, US Airways eliminates free pretzels due to fuel prices. Now, school districts are slashing computer spending to keep the buses running. Next thing we know, Google will start charging employees to ride the Google Bus to work.

Seeing how attacking startup lawyers seems to be en vogue this month, let's put this post in the category of "Things I wish lawyers told their startup clients."

Here's a situation I see all the time:

A pre-launch, stealth-mode company just closes a seed round of funding. Three weeks go by, and the news of the company's funding starts appearing in VentureBeat, PEHub, and Venturewire. The story is then picked up by mainstream tech bloggers and press. The CEO starts getting phone calls from journalists. I then receive frantic, angry phone calls and emails from the CEO that go something like this: "Dude! Did you announce the funding? We wanted to stay under the radar..."

I want to reply, "No. I didn't announce the funding. Your lawyer did."

The culprit is a little known SEC regulation called "Regulation D". A basic summary:

Under the Securities Act of 1933, any offer to sell securities must either be registered with the SEC or meet an exemption. Regulation D (or Reg D) contains three rules providing exemptions from the registration requirements, allowing some smaller companies to offer and sell their securities without having to register the securities with the SEC. While companies using a Reg D exemption do not have to register their securities and usually do not have to file reports with the SEC, they must file what’s known as a "Form D" after they first sell their securities. Form D is a brief notice that includes the names and addresses of the company’s executive officers and stock promoters, but contains little other information about the company.

When a company raises capital, most lawyers fill out the Form D paperwork on the company's behalf and stick it on the pile of papers a CEO has to sign on closing. (Click here to see the complete form in pdf format). There's little a company can do to avoid a Form D filing - more than 17,000 companies and partnerships made nearly 28,000 Form D filings in 2007. I'm continually surprised, however, by the fact that few attorneys actually tell their clients about this public disclosure. Maybe they don't mention it because they know that people can't access these documents online. (You can search the SEC database to see if any documents exist, but you can't access the actual content/document.) This by itself can be pretty revealing. For example, although Twitter announced their funding today, you could have searched the SEC database and saw that the round closed on June 9th. It's also a great way to get the address and phone number for stealth mode companies ;-)

The SEC makes hard copies of these filings available in a series of folders located in a public reference room at their Washington headquarters. There's about a two-week lag time between when the filings are processed and when they hit this room, and after 30 days they disappear. Also in the room are four computers, but they're without Internet access. And the staff members that work there are known to shrug their shoulders when asked for help. In other words, this room appears to be intentionally uncooperative - much like the private companies and partnerships that wish to keep the information contained in these filings under wraps. At VentureWire, news of start-up financings are our bread and butter, so we send a couple of helpful reporters from our Dow Jones Newswires bureau in Washington to sift through the filings and pull out the most interesting ones...

So it turns out that the SEC is the source of most of these "leaks".

But, wait, there's more. A few months ago, the SEC published rule amendments mandating the electronic filing of information required by Securities Act of 1933 Form D through the Internet. Starting next year, the data filed will be available on the SEC Web site and will be interactive and searchable. View the Final SEC Rule here.

One small positive change. While your company name and amount of funding will be public, apparently the forms have been changed so that companies no longer need to disclose names of investors that own more than 10% of a class of securities.

If you're starting a company and want to stay in "stealth mode", make sure you understand the impact of your Form D filing and factor that into your plans. And if you're a lawyer for a startup company, please tell your clients about the public disclosures you make on their behalf!

My recent post on patents discussed a fictitious "Founder's Manual For Pitching a VC" which would contain all of the cliche "lines" entrepreneurs give to answer some typical VC questions. However, just like canned pick-up-lines don't work in a bar, I don't think canned answers work for VCs.*

For example, let's take a look at the standard line used when asked about competition. The section would say something like: "When a VC asks about what happens if [INSERT LARGE ESTABLISHED PROSPECTIVE COMPETITOR HERE] decides to get into the market, tell the VC that their entry will validate the market."

I'm not sure what I felt back in November of 2000, when Amazon launched their used-book Marketplace just eleven months after we launched Half.com, but I doubt I was happily validated. I'm just fortunate that Half.com didn't join the legion of other companies whose business model were validated -- like Wordstar and Netscape were validated by Microsoft.

A quick Google search shows that companies of all sizes use the "validate" line. Obopay was validated by Amazon's launch of SMS purchasing last month. Microsoft feels validated that Google and Salesforce are integrating CRM and office productivity applications. Novell was validated by Oracle's support for Linux. Even Tesla Motors is validated by General Motor's launch of the Chevy Volt.

If you ask me, as a prospective investor in your company, I'd much rather you validate your own market. So, what should an entrepreneur say when asked about a prospective large competitor? That's my next post...

*NOTE - As a happily married man, I'm not basing my conclusion on the effectiveness of pick up lines on personal experience. Rather, I'm basing it on the numerous 1 star reviews on Amazon.Feel free to enjoy a preview of the book on Google Books and let me know if I'm drawing an incorrect conclusion. My favorite pickup line is #26 - "If beauty was a mustard, you'd be Grey Poupon"